Louisiana, Department of Labor v. United States Department of Labor

United States Court of Appeals,

Fifth Circuit.

No. 96-60004.

STATE OF LOUISIANA, DEPARTMENT OF LABOR, Petitioner,

City of New Orleans, Intervenor,

v.

UNITED STATES DEPARTMENT OF LABOR, Respondent.

March 28, 1997.

Petition for Review of a Final Decision of the United States
Department of Labor.

Before HIGGINBOTHAM, SMITH and BARKSDALE, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Pursuant to 29 U.S.C. § 1578(a)(1), the State of Louisiana and

the City of New Orleans petition for review of a final order of the

U.S. Department of Labor ("USDOL") disallowing certain expenses

allegedly incurred pursuant to the Job Training Partnership Act

("JTPA"), 29 U.S.C. § 1501 et seq., and requiring the state to

repay such disallowed expenses to the USDOL. Finding that

petitioners are not entitled cavalierly to disregard the

requirements of the JTPA, we deny the petition for review and

affirm the order of the USDOL.

I.

In 1983, the state entered into an agreement with the

Secretary of Labor to become a grant recipient under the JTPA.1

1
Pursuant to this agreement, the state is required to comply
with all rules and regulations governing the administration of JTPA
grant funds. See 20 C.F.R. § 627.1 (1986).

1
Under this agreement, the state disbursed federal funds to several

service delivery areas throughout the state, including New Orleans.

Thereafter, the service delivery areas solicited grant proposals

from service providers and selected subgrantees to receive the

grant funds.2 This case involves serious irregularities in the

administration of JTPA grant funds by the New Orleans Service

Delivery Area ("NOSDA").3

In the NOSDA, classroom training programs were generally

awarded under fixed-unit-price contracts, which demand successful

performance as a prerequisite for payment.4 Accordingly, the New

Orleans Client Center ("NOCC") was awarded JTPA grant funds to

conduct employment workshops for young adults during program year

2
Although JTPA funds may be expended by a service delivery
area or its service provider, the JTPA provides that the state
shall be responsible for all funds disbursed under the grant and
must hold subrecipients responsible for all funds received
thereunder. See 29 U.S.C. § 1574(d)-(e); 20 C.F.R. § 629.44(d)(1)
(1986).
3
The Orleans Private Industry Council ("OPIC") is formally
responsible for the administration of the JTPA program in the
NOSDA, but the New Orleans Office of Employment Training and
Development ("OETD") manages the JTPA program on behalf of the OPIC
and the city. Consequently, we refer to these administrative
entities collectively as the NOSDA.
4
Under a fixed-unit-price contract, compensation is based
exclusively on successful performance of the contract. For every
participant who successfully completes the job training program,
the service provider receives a fixed fee. In comparison, a
cost-reimbursement contract compensates service providers for the
reasonable and necessary costs incurred pursuant to the job
training program, without regard to students' success. See 20
C.F.R. § 629.38(e)(2) (1986); see also Job Training Partnership
Act: Requirements for Acceptable Fixed Unit Price, Performance-
Based Contracts, 54 Fed.Reg. 10,459 (1989) (stating the USDOL's
official interpretation of fixed-unit-price contracts under the
JTPA).

2
1985, at a cost of $57 per successful participant. Likewise,

Technical Training Designs, Inc. ("TTD"), was awarded JTPA grant

funds to provide youth competency training in basic computer skills

and remedial education during program years 1986 and 1987, at a

cost of $1,400 per successful participant. NOCC and TTD

successfully performed their obligations under the grant contracts,

and each was paid according to the fixed-unit-price formula.5

In 1988, the USDOL initiated an audit of the New Orleans JTPA

program, focusing on program years 1986-87.6 After finding

significant irregularities, the USDOL expanded the audit to cover

program years 1985 through 1989. The audit disclosed serious

deficiencies in procurement procedures, and auditors requested the

financial records of service providers to quantify the costs of

these deficiencies. Certain providers, however, refused

voluntarily to disclose their financial records, forcing the USDOL

to subpoena the records.7

The audit report, issued by the USDOL in 1991, questioned

grant costs in excess of $6.4 million and recommended that the city

be designated a high-risk subgrantee. All but $142,665 of these

challenged costs were ultimately resolved in a separate proceeding,

5
NOCC received a payment of $142,665 under the
fixed-unit-price contract, while TTD received payments of $798,630
and $280,420, respectively, under the two contracts.
6
Under the JTPA, the program year begins on July 1 of the
specified year and runs until June 30 of the succeeding year.
7
The service providers whose contracts form the basis of this
litigation—NOCC and TTD—were among those who refused to disclose
their financial records.

3
which is irrelevant to the instant case. The USDOL was unable,

however, to resolve objections concerning the fixed-unit-price

contract granted to the NOCC for program year 1985.

In 1992, the USDOL issued an initial determination in this

case, disallowing the entire unresolved NOCC debt of $142,665.

Likewise, the USDOL disallowed total payments of $847,633 made to

TTD under the fixed-unit-price contracts covering program years

1986 and 1987. Therefore, the initial determination disallowed a

total of $990,298 in expenses incurred under the fixed-unit-price

contracts between the NOSDA and NOCC and TTD.

After considering a response filed by the state that

demonstrated that the audit report overstated total payments under

the TTD contracts, the USDOL revised its initial determination,

reducing the total disallowed costs allocated to TTD by $54,460.

Likewise, the USDOL subsequently allowed additional costs of

$41,223 under the NOCC contract. In the final determination,

therefore, the total disallowance was reduced to $894,615.8

The state appealed this final determination to an

administrative law judge ("ALJ"), who affirmed the final

determination and ordered the state to repay the disallowed costs

of $894,615.9 The ALJ concluded that NOCC and TTD had failed to

8
This final disallowance represents the original disallowance
of $990,298 reduced by the $54,460 allowance for the TTD contract
and the $41,223 allowance for the NOCC contract. Of this final
disallowance, $793,173 was allocated to the TTD contract, and
$101,442 was allocated to the NOCC contract.
9
The JTPA expressly provides that grant funds expended in
violation of the act must be repaid to the United States, and
authorizes the Secretary of Labor to impose sanctions for

4
maintain accurate and reliable records as required by the JTPA10 and

that the NOSDA had violated statutory procurement procedures by

failing to determine whether the grant proposals submitted by NOCC

and TTD were fair and reasonable.11 The state timely appealed to

the Secretary of Labor, specifically identifying exceptions to the

decision as required by 29 U.S.C. § 1576(b), but the Secretary

refused to review the case. Therefore, the decision of the ALJ

became the final decision of the Secretary. See 29 U.S.C. §

1576(b).

The state timely filed a petition for review, pursuant to 29

U.S.C. § 1578(a)(1). We then granted the city's motion to

intervene in this petition for review. Having reviewed the

Secretary's decision, we deny the petition and affirm the

Secretary's decision.

noncompliance with the statute. See 29 U.S.C. § 1574(d)-(e).
10
The ALJ found that neither NOCC nor TTD had maintained
records of expenditures, as required by the JTPA. Indeed, the
financial records were so incomplete that it was impossible for
auditors to trace the grant funds.
11
In reviewing grant proposals, the ALJ found that the NOSDA
had not evaluated the cost-effectiveness of proposed programs, and
grants were awarded without considering more efficient means of
investing the grant funds. For example, the grant proposal
submitted by NOCC left the section concerning cost information
completely blank, and the NOSDA review committee failed to prepare
an evaluation form on the NOCC proposal. Nevertheless, the NOCC
proposal was accepted summarily, despite the fact that two members
of the OPIC did not even have copies of the proposal.

Likewise, during the period in question, the NOSDA did
not conduct surveys of comparable program costs to evaluate
the cost-effectiveness of the grant proposals submitted by
TTD. Nevertheless, despite these glaring deficiencies in the
procurement procedures, the NOSDA accepted both the NOCC and
TTD proposals.

5
 II.

The Secretary disallowed the challenged costs on two grounds,

concluding that the NOSDA had failed to comply with the procurement

procedures specified under the JTPA and that subgrantees NOCC and

TTD had failed to maintain accurate and reliable financial records

as required by the JTPA.12 We agree.

A.

A court entertaining a petition for review of a final decision

issued by the Secretary of Labor, pursuant to 29 U.S.C. § 1578(a),

may exercise only limited judicial review. "Review shall be

limited to questions of law and the Secretary's findings of fact

shall be conclusive if supported by substantial evidence." 29

U.S.C. § 1578(a)(3).

If the language of the JTPA is plain, we must enforce the

unambiguously expressed intent of Congress. Chevron, U.S.A., Inc.

v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43,

104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). If the statute is

ambiguous, however, we must defer to reasonable interpretations of

the statute by the USDOL, the agency charged with administering the

JTPA. Id. at 843-44, 104 S.Ct. at 2781-83.

Likewise, our review of factual findings by the Secretary is

12
In the final determination issued by the USDOL, the NOSDA was
also charged with conflicts of interest in the administration of
JTPA grant funds. The ALJ determined that a conflict of interest
had existed but concluded that the JTPA did not prohibit such
conflicts of interest during the period in question. See 29 U.S.C.
§ 1574(a)(3)(G) (1994). Therefore, the ALJ concluded that such
conflicts of interest did not justify disallowance of the
challenged expenses. We have no occasion to reconsider this
decision.

6
tempered by respect for the expertise of the administrative agency.

"Substantial evidence" is defined as "such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion."

Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206,

217, 83 L.Ed. 126 (1938); accord Pierce v. Underwood, 487 U.S.

552, 564-65, 108 S.Ct. 2541, 2550, 101 L.Ed.2d 490 (1988). This

standard contemplates something less than a preponderance of the

evidence, and the mere fact that a different conclusion might be

drawn from the evidence does not necessarily preclude a

determination that an administrative decision was supported by

substantial evidence. Consolo v. Federal Maritime Comm'n, 383 U.S.

607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966).

B.

First, the Secretary concluded that NOCC and TTD had failed

to maintain accurate and reliable records, as required by the JTPA.

During the period in question, the JTPA required grant recipients

to keep financial records sufficient to permit the preparation of

reports required by the act, and sufficient to permit the tracing

of grant funds to insure that the funds were not spent unlawfully.

See 29 U.S.C. § 1575(a)(1) (1982); 20 C.F.R. § 629.35(a) (1986).13

The NOSDA, NOCC, and TTD disregarded this obligation with reckless

abandon.

The Secretary's factual findings are supported by more than

substantial evidence. In its audit report, upon which the

13
Although Congress has subsequently amended the JTPA to
require specific reports from grant recipients, these requirements
do not govern the instant case. See 29 U.S.C. § 1575 (1994).

7
Secretary relied in denying the challenged expenses, the USDOL

found that the financial records maintained by NOCC and TTD were so

irregular and unreliable that it was impossible to determine with

any certainty whether JTPA grant funds had been allocated lawfully.

The Secretary concluded that the NOSDA, acting through its

subgrantees, had violated the JTPA by failing to maintain accurate

and reliable financial records.

The state does not contest the accuracy of these factual

findings but argues that it should be granted a special exemption

from the JTPA's accounting requirements. Because fixed-unit-price

contracts compensate the service provider only for successful

performance, guaranteeing a flat fee for each participant who

successfully graduates from the training program, the state avers

that service providers have no obligation to maintain financial

records under such fixed-unit-price contracts. This creative

interpretation is unsupported by the plain language of the JTPA,

the administrative regulations implementing the act, or previous

judicial interpretations of the JTPA.

The plain language of 29 U.S.C. § 1575(a)(1) is unambiguous,

requiring all recipients to maintain accurate and reliable records.

Under such circumstances, when a statute is plain and unambiguous,

we "give effect to the unambiguously expressed intent of Congress."

Chevron, 467 U.S. at 843, 104 S.Ct. at 2781; accord United Servs.

Auto. Ass'n v. Perry, 102 F.3d 144, 146 (5th Cir.1996). The plain

language of the JTPA, and the administrative regulations

promulgated thereunder, do not recognize a distinction between

8
fixed-unit-price contracts and cost-reimbursement contracts.

Consequently, neither do we.

Accordingly, JTPA grant recipients may not arrogate to

themselves the authority to distinguish between fixed-unit-price

contracts and cost-reimbursement contracts, nor may they disregard

with impunity the accounting requirements explicitly prescribed by

federal law. We decline the invitation to create an exemption from

the JTPA by judicial fiat.14

The state cannot excuse its own gross negligence and that of

its subrecipients by inventing exceptions from the accounting and

record-keeping requirements of the JTPA. Substantial evidence

supports the conclusion that Louisiana utterly failed to maintain

accurate and reliable financial records, in violation of 29 U.S.C.

§ 1575(a)(1), and the Secretary correctly held that such

nonfeasance constitutes a violation of the JTPA. Therefore, the

Secretary properly denied the challenged expenses and ordered the

state to repay the disallowed expenses. See Montgomery County v.

Department of Labor, 757 F.2d 1510, 1513 (4th Cir.1985); City of

Oakland v. Donovan, 703 F.2d 1104, 1107 (9th Cir.), modified, 707

F.2d 1013 (9th Cir.1983).15

14
Perhaps there are legitimate reasons to recognize a
distinction between fixed-unit-price contracts and
cost-reimbursement contracts for purposes of the JTPA, but these
arguments are properly addressed to Congress, not to this court.
15
Although Montgomery County and City of Oakland were decided
under the Comprehensive Employment and Training Act ("CETA"), 29
U.S.C. §§ 801-999 (repealed 1982), that statute was superseded by
the JTPA. Therefore, the relevant provisions of CETA and the JTPA
are effectively identical.

9
 Record keeping is at the heart of the federal oversight
and evaluation provisions of [JTPA] and its implementing
regulations. Only by requiring documentation to support
expenditures is the DOL able to verify that billions of
federal grant dollars are spent for the purposes intended by
Congress. Unless the burden of producing the required
documentation is placed on recipients, federal grantees would
be free to spend funds in whatever way they wished and obtain
virtual immunity from wrongdoing by failing to keep required
records. Neither [JTPA] nor the regulations permit such
anomalous results.

Montgomery County, 757 F.2d at 1513. Consequently, we deny the

petition and affirm the final decision of the Secretary disallowing

the challenged expenses of $894,615 and requiring the state to

repay these expenses from non-federal funds.

C.

In addition, the Secretary disallowed the challenged expenses

because the NOSDA failed to consider the cost-effectiveness of the

proposals submitted by NOCC and TTD. During the period in question,

the JTPA required service delivery areas requesting federal grant

funds to adopt "job training plans," see 29 U.S.C. § 1514(a)

(1982), which would include, inter alia, procedures for the

selection of service providers that considered past performance in

job training or related activities, fiscal accountability, and

ability to meet performance standards, see 29 U.S.C. § 1514(b)(5)

(1982).

Furthermore, the JTPA specified that the "primary

consideration" for selection of service providers should be the

effectiveness of the service provider in delivering the necessary

services, expressly citing the cost of the proposal as one variable

10
in this calculus. See 29 U.S.C. § 1517(a) (1982).16 Compliance

with these procurement procedures was required to ensure that all

costs allocated to the grant were allowed by the JTPA.17 Finding

that the NOSDA had cavalierly disregarded these procurement

procedures, the Secretary concluded that the challenged expenses of

$894,615 should be disallowed.18

This conclusion is supported by substantial evidence. First,

the Secretary found no evidence to support the conclusion that the

NOSDA had conducted a cost analysis of the grant proposals

submitted by NOCC and TTD. To the contrary, the staff review

committee failed to consider cost-effectiveness in preparing its

16
During the period in question, JTPA procurement procedures
were governed by 20 C.F.R. § 629.34 (1986). The state contends
that the procurement procedures employed by the NOSDA were
consistent with applicable state and local law, as required by 20
C.F.R. § 629.34. That provision, however, expressly incorporated
the requirements of 29 U.S.C. § 1517, the federal statute upon
which the Secretary relied in disallowing the challenged costs.
Therefore, compliance with state and local law offers no shelter to
the state.
17
"Allowable costs" under the JTPA must be "necessary and
reasonable for proper and efficient administration of the program"
and must be allocable to the grant under the principles provided in
the JTPA. 20 C.F.R. § 629.37(a) (1986). Costs incurred in
violation of federal law are not allowable under the JTPA. See 20
C.F.R. § 629.37(c)(1) (1986).
18
The state argues that the Secretary violated principles of
due process by retroactively applying federal regulations
concerning procurement procedures that were not enacted until years
after the contracts in question were executed. See, e.g., 29
U.S.C. § 1574(a)(3)(C)-(D) (1994); 20 C.F.R. § 627.420(e) (1996).
This argument is without merit, as the Secretary based the final
decision on statutes and regulations in effect at the time the
contracts were executed. See 29 U.S.C. § 1517(a) (1982); 20
C.F.R. § 629.37(a) (1986). Consequently, the Secretary's final
decision does not constitute a retroactive application of the JTPA.

11
evaluation of the NOCC proposal, and the proposal did not contain

any budget or cost information as required by the JTPA. Instead,

the NOCC proposal merely stated an estimated "slot cost," without

providing any basis to determine whether the estimated cost was

fair and reasonable.19 Nevertheless, despite these omissions, and

despite the fact that two voting members never even received a copy

of the NOCC proposal, the OPIC summarily accepted the NOCC

proposal.

Moreover, the Secretary determined that the fixed-unit-price

contract awarded to NOCC for program year 1985 was not reasonable,

because the NOCC was already being funded by a cost-reimbursement

contract when the fixed-unit-price contract was awarded to NOCC.

Indeed, the fixed-unit-price contract funded an employment workshop

during the last month of the preceding cost-reimbursement contract,

thereby duplicating efforts and duplicating program participants.

Under these suspect circumstances, auditors concluded that it

was highly irregular to award a fixed-unit-price contract to a

current contractor during the last month of a cost-reimbursement

contract, without conducting any pre-award analysis of projected

expenses. The Secretary concluded that these irregular procurement

19
Moreover, the proposal submitted by NOCC concerned program
year 1985, and NOCC performed its obligations under the contract
during that program year. In defense of its procurement
procedures, the NOSDA submitted a request for proposals issued by
the recipient for program year 1986, and the corresponding grant
proposals received for program year 1986. Because these proposals
were not in direct competition with the NOCC proposal, however, the
Secretary properly concluded that these documents were irrelevant
to the determination of whether the NOCC proposal was fair and
reasonable.

12
procedures violated the requirement that service delivery areas

must consider cost-effectiveness and must determine whether grant

proposals are fair and reasonable, and disallowed the challenged

expenses.20

Likewise, the NOSDA awarded grant funds to TTD without

conducting any analysis of cost-effectiveness. The grant proposal

submitted by TTD for program year 1986 did not contain adequate

budget information from which to determine whether the contract

price was fair and reasonable; for program year 1987, the grant

proposal submitted by TTD was never even provided to the auditors,

who were unable to determine whether the contract price was fair

and reasonable, or whether costs had even been considered by the

NOSDA as required by the JTPA.21 Therefore, the Secretary concluded

that Louisiana had violated the JTPA by failing to consider the

cost-effectiveness of the grant proposals submitted by TTD prior to

awarding the contracts.

The state defends the procurement procedures adopted by the

NOSDA, noting that subsequent surveys proved that the NOCC and TTD

contracts were fair and reasonable. That is not the point. Once

again, the state seeks to remedy the egregious defects in its

20
The sole evidence adduced by the state to rebut this factual
conclusion—oblique testimony offered by three representatives of
the city—was discredited by the Secretary. After weighing all the
evidence in the record, the Secretary found this self-serving
testimony unpersuasive. We agree.
21
Moreover, the auditors noted that TTD had subsequently agreed
to provide identical training programs in program year 1988 for
$150 less per participant than the fixed-unit-price contracts
executed in program years 1986 and 1987.

13
procedures by retrospectively inventing exceptions to the JTPA. The

plain language of the JTPA requires service delivery areas to

consider cost-effectiveness in the decision to award grant funds,

not to justify awards after those funds have been disbursed. See

29 U.S.C. § 1517(a) (1982). Substantial evidence supports the

conclusion that the NOSDA failed to honor these procurement

procedures, and the Secretary correctly disallowed the challenged

expenses of $894,615.

The JTPA unambiguously mandates that service delivery areas

disbursing federal grant funds must take an ounce of prevention, by

determining whether grant proposals are fair and reasonable; the

state cannot excuse its failure to do so merely by demonstrating

that it has subsequently undertaken a pound of cure. Consequently,

we deny the petition for review and affirm the final decision of

the Secretary disallowing the challenged expenses of $894,615 and

requiring the state to repay these expenses from non-federal funds.

D.

Finally, Louisiana seeks to escape its obligations under the

JTPA by raising a myriad of procedural objections to the USDOL

audit, the decision of the ALJ, and the subsequent refusal of the

Secretary to review the decision and waive repayment of the

disallowed expenses. We have considered these objections and find

them to be meritless.

III.

We conclude that the final decision of the Secretary is based

on substantial evidence, and that the state and the NOSDA and its

14
subgrantees cavalierly disregarded the accounting requirements and

procurement procedures specified by the JTPA and the accompanying

regulations. Federal grant recipients who are entrusted with

public funds are bound to fulfill that public trust by discharging

their duties in strict compliance with the requirements established

by Congress. Accordingly, we emphasize that the procedural

requirements of the JTPA are not merely hortatory ideals; they are

obligatory duties. Grant recipients who, like the NOSDA and its

subgrantees, fail to honor these procedural requirements, dishonor

and disserve the public trust.22

The petition for review is DENIED, and the final decision of

the Secretary of Labor is AFFIRMED.

22
It is ironic that today's result shifts the burden of these
disallowed expenses to the state's taxpayers. We also recognize
that our decision requires the city to assume responsibility for
$894,615 of disallowed expenses as a consequence of the procedural
deficiencies in the grant process and the unprofessional accounting
practices of its subgrantees. We express no opinion as to whether
the city may seek indemnity for these expenses from its
subgrantees.

15